The Prudential Regulatory Authority (PRA) has recently announced regulatory changes to the way that lenders assess Buy-to-Let mortgage applications. These changes will be implemented by lenders before January 2017 and may affect your ability to obtain a Buy-to-Let mortgage, the amount that you can borrow and the information you will need to supply.
All Buy-to-Let lenders require that the rental income of a property covers the mortgage payment plus a margin to cover other costs. Calculated as a percentage, this is called the Interest Rate Coverage (ICR) and is the main focus of these latest changes:
Going forward, lenders will require a minimum ICR of 125% and will base their 'stress test' calculations on an interest rate of at least 5.5%, regardless of how low the interest rate you have secured actually is.
Additional costs such as agency fees and council tax etc. Will be included in the ICR calculations, as well as changes to income tax liability due to the reductions in interest relief between 2017 to 2020.
There is an exception on 5yr+ fixed rate products as these can be stress tested at 125% of pay rate and the ICR can also be topped up using a personal income affordability test.
In addition to changes to the way that the ICR is used, lenders may subject landlords with four or more properties to a 'specialist and proportionate' underwriting approach.
Some individual circumstances fall outside of the new regulations, including:
Remortgages of Buy-to-Lets with no additional borrowing (apart from any added lender or admin fees).
Those with an income in excess of £300k income and/or £3,000,000 in net assets
THE EXPERT VIEW
We asked our recommended mortgage broker, Springtide Capital, for their view of these changes:
"We have seen in the past that when these kind of regulations are recommended, the majority of lenders will exceed the minimum requirements to ensure they are not seen to be too close to the "minimum" allowed. We have already seen a number of lenders move their ICR to 145% with a 5.5% interest rate stress test and we envisage that a number of those still at 125% are likely to increase further."
ACT NOW TO TAKE ADVANTAGE OF THE CURRENT REGULATIONS
It is difficult to know exactly where the lenders will end up, however there is a window of opportunity to act now to review your portfolio growth strategy and ensure you can benefit from a more relaxed stance before the new rules have to be implemented. Our preferred mortgage broker Springtide Capital is available to discuss the above changes in more detail with you and provide advice to suit your individual circumstances.
To speak to an experienced BTL mortgage broker today, please call 020 3040 4400, email firstname.lastname@example.org